- In today's video, I'm gonna
go over the pros and cons of a 15-year mortgage
versus a 30-year mortgage, and at the end of this video, I'm gonna share with you a third option which I personally chose
which, in my opinion, gives me the best of both programs. So let's start off by talking
about the 30-year mortgage because despite the fact
that, with a 30-year mortgage, you are paying significantly
more money in interest over the lifetime of the loan, that is still the most popular
mortgage program in America and in fact accounts for over
90% or all home mortgages. So one of the biggest
benefits of a 30-year mortgage is obviously that your
monthly mortgage payment's gonna be significantly lower
than a 15-year mortgage for the same amount. If you were to get a $300,000
loan on a 15-year mortgage at 3.75%, your monthly mortgage payment would be $2,465 a month. Now if you were to take out
that same $300,000 loan, and let's say on a 30-year loan, and your interest rate is
let's say 4% 'cause typically the interest rate on a 30-yer loan is higher than on a 15-year loan, so at 4%, your monthly mortgage payment would be $1,715 a month, so that's a difference of $750
a month in monthly expenses that you'll be saving by
going with a 30-year loan versus a 15-year loan. Now, let's say you're actually okay making that higher mortgage
payment of $2,465 a month, but you still wanted to
use a 30-year mortgage, so what that means is that,
instead of a $300,000 loan, you could take out a $470,000
loan on a 30-year mortgage for the same monthly
cost as a $300,000 loan on a 15-year mortgage, and honestly, I feel like that is the
reason why most Americans actually go with the 30-year
loan versus a 15-year loan, not because they crunched
the numbers and determined that a 30-year loan is more in line with their financial goals, but simply because of the
fact that most Americans go with the most expensive
home that their mortgage lender says that they can qualify for. Now, there is another big
reason why you should consider a 30-year loan over a 15-year loan, and that is opportunity cost, and what that means is what
you could have invested that money in instead of simply
paying down your mortgage. So if you went with a $300,000
loan and went the 30-year instead of a 15-year, you're
now saving $750 a month, so you have to ask yourself
what else could you have invested that money in
and gotten a better return on that investment rather than simply paying down your mortgage? For example, could you have
invested that $750 a month in a 401k or maybe starting a new business or in buying crypto-currency
or maybe as a mortgage payment on a rental property that you purchase? Over the last 90 years, the S&P 500 has seen an
annual return of 9.8% if you reinvest any
dividends that you receive, and there are people who
will argue that your money is better off investing in the S&P 500 to get a 9.8% return rather
than paying down your mortgage to avoid a 4% interest rate, and that may not sound like much, but by investing in the stock market, you're benefiting from
those two magical words, compound interest. If you invested that $750 a
month into a S&P 500 index fund, and you did see an annual return of 9.8%, you would've invested
$270,000 over those 30 years, but at the end of those 30 years, that money would now
be worth $1.4 million, and this is why a lot of
people make the argument that you're better off
extending your mortgage for as long as possible
so you have more money that you can invest in the stock market and get a better return on that money. Now, another big benefit
to taking out as long of a mortgage as you can
is that you're actually benefiting from inflation,
and just to recap, inflation is deliberately
worked into our monetary system to encourage people to
spend and borrow money because every single day that
they hold on to that money, that money itself is
actually losing value. Over the last 10 years,
we've seen an average rate of inflation of about 2% a year, so every single year your
money is worth 2% less than it was the year before. So just as an example, if
you borrowed $300,000 today, 12 months from now, that
loan is gonna be equivalent to $294 in today's money
because 12 months from now, your money itself is
losing 2% of its value, and this really is an
intentional aspect of our money, and it's closely monitored and controlled by the Federal Reserve. If it was the other way
around, if we saw deflation and that your money actually
appreciated in value over time, people would be
less likely to actually spend that money, but since
we know that our money is constantly losing value,
we're encouraged to spend that money as quickly as
we can and not hold on to the money simply in a savings account, but you can actually
benefit from inflation by taking out a longer mortgage loan. If you were to take out that $300,000 loan right now on a 30-year mortgage, your monthly payment would be $1,715, but 30 years from now
on your last payment, that monthly payment
is gonna be equivalent to $850 in today's money
because money itself is depreciating in value 2%
a year for the next 30 years, and I know it's a little tricky to kinda wrap your brain around this, that your money's actually
losing value every single day, but that's the benefit of a fixed-rate mortgage for 30 years. 30 years from now, your
mortgage payment's gonna be about the same as it is today, but that money is gonna be worth far less. In fact, it's gonna be
worth almost about half of what it's worth right now. So taking out as long of a loan as you can is one of the few ways that we can actually benefit from inflation. Now obviously, there are
some drawbacks in taking out a 30-year loan versus a 15-year loan, and the biggest one being
is that you're going to pay a lot more money in interest
on that loan on a 30-year than you would if you went with a 15-year. So on that same $300,000
loan over 30 years at a 4% interest rate, over
that lifetime of that loan, you're gonna pay the bank
$215,000 just in interest alone. Now instead, if you
went with a 15-year loan and you got a slightly lower
interest rate, let's say 3.75%, you're only gonna be paying
the bank $97,000 in interest over the lifetime of that loan, and the reason for that is one, your interest rate's gonna be lower, but you're also paying the
loan off twice as fast, so that's half as many loan
payments that you need to make that you're paying interest on. So that's a difference of $122,000 that you're going to be saving in interest by going with a 15-year
loan versus a 30-year loan. Now, there's another
benefit to the 15-year loan, and that's if you actually don't intend to live in the home for
the next 30 years or so, but let's say you only live in the home for the next seven years, and that's how you're gonna be building a significantly more amount
of equity in your home over the seven years on a 15-year mortgage than you would on a 30-year mortgage. So if you look at it
from that perspective, it's almost like you're forcing yourself to save money every single month, but instead of having
it in a savings account, you're saving it in the form
of equity in your property, and if you're like most Americans, you have a hard time seeing
that money in your account and not spending it
and actually saving it, so for many people, this could
be a very effective tactic to automatically put money
away in a savings account, but it's in for form of
equity in your property, and you can't touch that equity until you actually sell your home. So if we go back to our
$300,000 loan after seven years on a 30-year mortgage and
assuming that the market value of the home has not changed at all, you would have built up $41,000 in equity over those seven years. If you instead went
with a 15-year mortgage, over those same seven years,
you would have built up $115,000 in equity in your home, and that's an additional $77,000 in equity that you would have
after living in the home for just seven years. So the real question is
which of these two options is right for you, and why
did I personally not go with either of these options? So I think it really comes down to what your personal financial goals are, and if your goal is to get
to the end of your life with as much money as possible
in your banking account, then yeah, I think that a 30-year mortgage is probably the best option for you. That way, you can take that savings that you're making every single month and reinvest it in other investments that are gonna give you a
higher ROI on your money such as stocks, crypto-currencies,
starting a business, or investing in other rental properties, but you just need to make
sure that you actually have the discipline to actually
save that money and invest it and not just squander that money or simply buy a more expensive home. Now getting to the end of
your life with as much money as you possibly can is actually not everyone's financial goals. For many people, their goal
is to simply get out of debt. For a lot of people, the
entire notion of ever retiring is hinged on them getting out of debt and eliminating that
monthly mortgage payment, and by going with a 15-year mortgage, you are going to accomplish
that goal significantly quicker than if you went with a 30-year mortgage, and after you pay off your 15 mortgage, there's nothing saying that
you can't now take that money that you were putting
towards your mortgage payment and now start investing
that in the stock market. However, starting 15 years later, you're not gonna benefit
from compound interest nearly as much as if you were
to start 15 years earlier. My personal goals lie somewhere in between these two extremes. Personally, I wanna
retire by the time I'm 45, and I'm 35 right now, so to achieve this, I need to do two things. I need to increase my passive income. Right now, I receive about
$2,000 passive income from some rental properties, from YouTube, and a few other areas, but I also need to decrease
my monthly payments, and like many Americans, my
largest payment right now is my mortgage payment. If I could eliminate my mortgage payment, that significantly reduces
the amount of passive income that I need to bring in
every month in order for me to retire or at least semi-retire. And this is why I chose
to go with a 30-year loan, but I'm making extra payment
towards the principles with every monthly mortgage payment, and this is gonna allow
me to pay off my mortgage significantly sooner than 30 years, and the biggest reason
why I like this option is it gives me more
flexibility with my money, and for me, that
flexibility is worth paying the extra 0.25% in interest that I get with a 30-year loan versus a 15-year loan. If I'd gone with a 15-year mortgage, I'd be stuck with that higher
monthly mortgage payment, no matter what my current
financial situation is, so if I lose my job or I have
a lull in my income coming in or I see a great investment opportunity, my money would be tied up in
that higher mortgage payment for 15 years, and I wouldn't be able to take advantage of those other
investment opportunities. So as an example, when
I left the Air Force and started my career
as a real estate agent, that was very uncertain
times for me financially, and I actually stopped my extra payments towards my mortgage for
about a year and a half when I first started my
career as a real estate agent just because I wasn't as
certain that I was gonna have consistent income coming in, and I wanted to reduce my monthly expenses as much as I could, but now that I've kinda established myself as a real estate agent and I'm consistently bringing in income, I've actually ramped up my extra payments towards my mortgage. Another example is that I
currently own one rental property, but let's say I saw
another rental opportunity, and I knew that I could
make money off of this, and I found a great
investment opportunity. I could stop making those extra payments towards my mortgage and
instead put that towards a new mortgage for this
second investment property. So for me personally, having
that flexibility with my money and making those extra
payments towards my principle to pay off my mortgage sooner,
making that optional for me, that is incredibly valuable
and absolutely worth the extra quarter of a percent
in interest that I'm paying, but no matter what your
personal financial goals are, if you wanna learn 10 hacks to
pay your mortgage off early, click right here to check
out my video on that, and if you wanna learn more financial and real estate strategies, subscribe and hit that
bell icon and get notified every time I upload a new video. Thanks so much for watching, and I'll see you guys
over in the next video.
